Reports that Unilever is preparing to sell off its spreads business make sense as the group looks to return cash to shareholders, but ‘Sprexit’ alone won’t be enough to satisfy its increasingly demanding investors.

The story that Unilever is willing to divest spreads comes as little surprise – effectively the “for sale” signs were firmly pitched over the division when Unilever span the underperforming business off in December 2014.

Non-core food disposals have been widely predicted since the announcement of a strategic review after Kraft Heinz’s failed takeover approach – and few Unilever brands look less “core” than its spreads despite the company’s protestations to the contrary at the time of the 2014 spin-off.

The desire to sell has understandably been intensified by the Kraft Heinz saga, but the reasons Unilever hasn’t yet struck a deal for brands including Flora margarine and Stork butter remain.

Ultimately it comes down to price. Unilever has not felt the need or desire to sell on the cheap because the division still contributes a decent chunk of profitability.

The division boosted cash profits by over €80m in 2016 and runs with an operating margin of over 20% - so Unilever has wanted to be adequately compensated for losing this not insignificant addition to its bottom line.

Broker SG estimates 2017 spreads sales of €3.2bn (5.8% of Unilever’s total sales) and EBITDA of €749m, which values the business at between €6.7bn to €8.2bn (albeit the separate spreads unit doesn’t include emerging markets sales).

So the business doesn’t come cheap and there are only a few global players with pockets deep enough – Kraft Heinz and multi-national private equity players being most notably mentioned – able and potentially willing to fund a deal of that size.

The issue is that bidders are understandably reluctant to pay a high premium for a portfolio of brands in a category in long-term structural decline. Sales in the division have been falling for many years as bread consumption and the supposed health benefits of margarine continue to be eroded.

So bidders are being asked to stump up £6bn-plus for a business with almost no opportunity for top-line growth. That perhaps explains better why Unilever is yet to sell the division rather than any long-term commitment to the category.

CEO Paul Polman admitted as much in January 2016 telling analysts: “I can get rid of this business tomorrow by giving it away to someone. But that’s criminal.”

Indeed, if media reports are to be believed the reason he sat down in the first place with Kraft Heinz chairman Alex Behring earlier this year was because he thought the US group was interested in a making a bid for the spreads business – which itself suggest a deal has always been there to be made at the right price.

So the weekend news that Unilever is looking to sell off spreads is neither particularly new or a guarantee that ‘Sprexit’ will now happen. Ex-Unilever man Dave Lewis found at Tesco that announcing the intention to sell off a business is not the same as selling it when the supermarket’s efforts to sell £2bn-valued data arm Dunnhubmy came to nothing as a plethora of potential suitors wouldn’t stump up an acceptable amount.

Even if the spreads business does find a new home, that sale on its own is unlikely to wholly satisfy Unilever investors.

Broker Societe Generale this week put out an exhaustive review of Unilever’s options, outlining 16 different scenarios – ranging from a wholesale break-up of the group to installing new management.

It ranked a sale of the spreads division as only the third most likely scenario (giving it a 65% chance), noting: “Outside of Kraft Heinz, it’s not obvious to us who the other potential trade buyers might be… the spreads business has many characteristics which would appeal to private equity, but the size of the overall transaction could be an impediment.”

SG says more immediately likely scenarios for its strategic review next month are increasing margin guidance/cost savings and announcing a share buyback programme or a special dividend.

However, it also suggests more radical action is not unlikely – ranking a spin-off of Unilever’s food division as a 60% chance (and an outright sale at 40%) or a major acquisition such as Colgate or Reckitt Benckiser’s home care division at 50%.

Merely pursuing a spreads sell-off won’t mollify the 53% of investors (according to a survey by Bernstein) that wanted the Unilever board to engage with Kraft Heinz’s bid.

Unilever is thought to be reluctant to sell-off the food division in its entirety, but there is speculation that some key investors want Unilever to focus wholesale on the higher margin personal goods sector. Allianz has already gone on record saying a food division spin-off “makes sense on paper”.

When Polman announces the results of its strategic review next month it will be a major surprise if there is no mention of the desire to sell-off its spreads business. But that is now the very least investors expect and Unilever knows very clearly the time has come to deliver.

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